Cooling Labor Market Can Help Inflation Come Down

A group of people in work clothes walking over a bridge in a city.

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Inflation is affected by a multitude of factors in the economy, and it's not always easy to keep tabs on all of them. To help you understand what is going on and what we expect to happen in the future, our highly-experienced Kiplinger Letter team will keep you abreast of the latest developments and forecasts (Get a free issue of The Kiplinger Letter or subscribe). You'll get all the latest news first by subscribing, but we will publish many (but not all) of the forecasts a few days afterward online. Here’s the latest...

Though the labor market still looks healthy, it’s showing signs of cooling. Jobless workers can’t expect to find a position as soon as they start looking, as was typical during the peak of the COVID-era labor crunch. They have to hunt now, though there is still plenty to hunt for. Also, workers with jobs aren’t quitting freely, the way they were back when it was so easy to land another job. The quit rate is back to its prepandemic level, signaling greater caution about job availability. What’s more, the unemployment rate and jobless claims are nudging up, though they remain low.

This nascent trend is good news for the Federal Reserve, as it looks for clues as to how fast inflation will come down. The Fed can’t reach its overall inflation goal until wages stop rising so quickly, so a slowdown in hiring and raises will be welcome. Lately, wages have been rising at a 4.3% annual rate. By year-end, we look for 3.5%.

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Of course, a downturn in hiring may presage a recession. We expect one to arrive sometime late this year or early in 2024, though it should be mild. However, there’s still hope that if the Fed’s interest rate hikes end soon, and if the labor market slows but doesn’t stumble, we might just skate by with a period of weak growth.

This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.

David is both staff economist and reporter for The Kiplinger Letter, overseeing Kiplinger forecasts for the U.S. and world economies. Previously, he was senior principal economist in the Center for Forecasting and Modeling at IHS/GlobalInsight, and an economist in the Chief Economist's Office of the U.S. Department of Commerce. David has co-written weekly reports on economic conditions since 1992, and has forecasted GDP and its components since 1995, beating the Blue Chip Indicators forecasts two-thirds of the time. David is a Certified Business Economist as recognized by the National Association for Business Economics. He has two master's degrees and is ABD in economics from the University of North Carolina at Chapel Hill.